Compare that to the average expense ratio for domestic stock funds of 1.37%, according to Morningstar. If beta (the market return) can be had for 0.07%, you're paying 1.30% for alpha (the degree to which a manager beats or loses to the market).

But by now, you know that most investors are paying 1.30% to lose to the market. According to Standard & Poor's, as of mid-2009 62.95% of large-cap funds lost to the S&P 500, 73.48% of mid-cap funds lost to the S&P 400, and 67.68% of small-cap funds lost to the S&P 600 over the past five years.

When you look at average annual returns, the average large-cap fund actually edged out the S&P 500, -2.21 to -2.25%, but actively managed mid-cap funds underperformed by 1.23% a year, and small-cap funds underperformed by 1.12%.

This all makes "alpha" really, really expensive.

I'm not dogmatic about index funds; I own several actively managed funds, as well as some individual stocks. But my portfolio is built on a foundation of index funds, and I branch out from there, fully aware of the odds I'm playing.

P.S. Standard & Poor's isn't necessarily a disinterested bystander in the "active vs. passive" debate, since they get licensing fees for every fund that tracks one of their indexes. So I would be interested to see other studies, or criticisms of S&P's methodology.